EUR 850.00 For Business Accounts Only

Morningstar | Energy Transfer's Consolidation Comes Earlier Than Expected; Upside for ETP

We are raising our fair value estimate for Energy Transfer Partners to $28 per unit from $22 and reaffirming our $22 fair value estimate for Energy Transfer Equity after the family announced a long-anticipated consolidation plan.

ETP unitholders will receive 1.28 ETE units, valuing the deal at $28 billion, and ETE will assume ETP's $33 billion of debt. We are reaffirming our no-moat and stable moat trend ratings for the family. We expect the deal to close as proposed. We continue to consider Energy Transfer one of the cheapest midstream energy firms that we cover.

We think ETE's proposed unit exchange ratio is exceedingly generous, especially given its effective ability to control the terms. The unit exchange ratio implies a $23.59 per unit value for ETP based on ETE's closing unit price Aug. 1, an 11% premium even after the unit prices had begun to diverge in the last month. The deal represents 28% premium to what we considered a fair exchange ratio.

Despite the premium, we think ETE unitholders can still benefit if a simpler corporate structure attracts more investors and lowers ETE's cost of capital. This will be important as ETE unitholders now will have to fund ETP's growth investment, which we think will average $2 billion annually in 2019-21. ETE also will have to fund ETP's deleveraging plans.

We don't expect much change in the companies' distributions. ETE already had been forgoing its incentive distribution rights payments to support ETP's investment. We didn't expect full IDR payments to resume until late next year after ETP reduced its leverage and finished its in-progress capital investments. The consolidation will eliminate the IDRs.